📗 Educational Post :
What is Risk Management?
Risk management is the process used to mitigate or protect your personal trading account from the danger of losing all your account balance. The risk is defined as the likeliness a loss will occur. Basically, risk management it’s just a method to control risk exposure when trading.
Risk management it’s like the foundation of a house. When you build a house you first start with the foundation layers and only then you start building the walls and the roof and everything else. On that note, risk management is the foundation of a successful trading plan.
📗 Educational Post :
We can basically break risk management foundation into 3 layers:
1. Risk Planning
2. Trading Risk Reward ratio
3. Position Sizing
1. Risk Planning - Trading Risk Reward Ratio
Planning your risk will help you maintain consistency with the risk we take trading the markets. Becoming a consistent trader is one of the biggest hurdles that you need to conquer and it can only be done right from day one if you plan your risk exposure.
We need to be able to answer one simple question:
🤔How much are you willing to risk per trade?
👉The answer to this question is a personal preference and it comes down to your risk tolerance. However, professional money managers recommend NOT RISKING MORE THAN 2% on any particular trading idea.
How to determine the risk-dollar amount :
Risk BTC Amount = Account size * %Risk
For example, if your account balance is 5 btc and your risk tolerance is 2% your BTC. Risk amount is 0.1 btc per trade.
Risk BTC Amount = 5BTC * 2% =0.1BTC
By calculating the risk-dollar amount we can ascertain how much we’re going to lose if the trade goes against us. In our particular case, the maximum loss would be 0.1BTC.
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